Q2 2022 Hexcel Corp Earnings Call
Ladies and gentlemen, thank you for standing by.
My name is Brent and I will be your.
Conference operator today.
At this time I would like to welcome everyone to the XL Q2, 2022 earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question at that time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again Crestar one thank you.
Now my pleasure to turn today's call over to Mr. Patrick Winter Lynch, Chief Financial Officer, Sir. Please go ahead.
Thanks, Brian .
Good morning, everyone welcome to Hexcel Corporation's second quarter 2022 earnings conference call before beginning let me cover this amount of Ts I want to remind everyone about the safe Harbor provisions related to any forward looking statements. We may make during the course of this call.
Certain statements contained in this call may constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
They involve estimates assumptions judgments and uncertainties caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward looking statements today.
These factors are detailed in the company's SEC filings and last Night's news release.
A replay of this call will be available on the Investor Relations page of our website.
Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material.
And not be recorded or rebroadcast without our express permission your participation on this call constitutes your consent to that request.
With me today on mixed tonnage on chairman, CEO , and President and Kurt Goddard Vice President of Investor Relations.
The purpose of the call is to review our second quarter 2022 results detailed in unusually issued yesterday.
Now, let me turn the call over to Nick.
Thanks, Patrick.
Morning, everyone and thank you for joining us today as we share our second quarter 2022 results.
We started the year with great momentum and carried that forward into the second quarter.
X all delivered consistent sustained performance and solid results, while overcoming significant macroeconomic challenges, including supply chain constraints and inflation.
With almost 50% growth in our commercial aerospace sales year over year, we are confident that the pull for lightweight advanced composites for next generation aircraft is strong where our older model aircraft remain parked and backlogs continue to grow for lighter more fuel efficient.
And aerodynamic aircraft that are content rich with our innovative technology.
The strength of the post pandemic aerospace recovery is very good news, we are experiencing strong upticks in build rates in commercial aerospace and business Jets the space and defense market has remained robust throughout the pandemic and is showing signs of further strengthening.
We are also seeing growing demand for composite materials and industrial and recreational markets.
At the same time, our production facilities are faced with rising energy prices higher costs for some raw materials combined with a constrained supply chain, resulting an extensive global logistical challenges.
Along with a tight labor market and less experienced new employees there are headwinds to our efforts to meet this exceptionally strong demand.
These challenges are not unique to heck styles. However, I am confident in our ability to manage through the uncertainties and exciting times ahead.
As you will know operational excellence is a core focus for hexcel to streamline processes drive productivity and work more efficiently.
During recent years, our teams have delivered significant cost reductions through continuous improvement projects for the benefit of our customers and for hexcel.
We're continuing aggressive actions yet with inflation in the U S and Europe at historically high levels. It is challenging to rapidly offset the immediate inflationary impacts through process and productivity enhancements. However, we remain committed and we will never relax in our efforts to address and overcome these.
Headwinds.
The keys to our continued success throughout the pandemic and even now as we address its aftermath, our alignment and transparency with our customers and suppliers as well as our ability to pivot and flex as our markets dictate.
We will remain vigilant and agile, giving us a tremendous competitive advantage as we work through the current uncertainties.
With every situation, we face hexcel remains focused on staying aligned with our customers and delivering on our commitments.
Now, let's turn to some specifics reported in our earnings release last night.
Second quarter sales of $393 million were about 26% higher in constant currency compared to Q2 2021.
Second quarter adjusted diluted EPS was <unk> 33.
Compared to <unk> last year.
Commercial aerospace sales of about $230 million were up 49, 5% in constant currency led by growth in the <unk> hundred 50, <unk> hundred 20, Neo and 737 Max programs.
This is the fourth consecutive quarter of double digit sales growth in commercial aerospace.
As the market recovers hexcel benefits from the continued penetration of lightweight composite materials as well as our relentless commitment to partner with and serve our customers.
Business Jets and regional aircraft sales increased more than 75% for the second quarter of 2022 compared to the second quarter of 2021.
When it comes to business Jets, we continue to see growth for hexcel, our content on some of the new large cabin business Jets falls and the previously disclosed range of 200000 to $500000.
Reflective of that is the recent long term agreement, we announced this month to supply carbon fiber <unk> for the composite rich to so F tenex large cabin business jet.
It reaffirms our strong partnership with the salt.
While we are always pleased to announce new business. This particular selection represents a milestone in that it is the first to so business jet program to incorporate high performance advanced carbon fiber composites and the manufacturer of its aircraft wings.
Thanks to hexcel carbon fiber solutions the wide high speed wing will be made for maximum strength reduced weight and minimum drag leading to enhanced performance and fuel efficiency.
The Falcon Tenex as planned to enter service at the end of 2025.
Also let me mention a couple of other highlights during the quarter.
For the third consecutive year, our team at Casa Grande, Arizona has been recognized by Boeing with its silver supply chain performance Achievement Award for achieving superior supplier excellence.
<unk> is the world's largest honeycomb producer for the aerospace industry and much of it is produced at our Casa Grande site.
In June we celebrated with Airbus as a $3 21, XLR completed its maiden flight.
<unk> as a major supplier of advanced composite materials for the aircraft as well as the composite rich CFM leap and Pratt <unk> Whitney geared turbofan engines powering this newest variation and the <unk> hundred 20 Neo family.
Our lightweight composite materials provide weight savings and performance enhancements that reduce fuel consumption and emissions as well as long term maintenance costs.
Turning to space and defense.
Sales of about $112 million represented a 7% increase in constant currency.
We are experiencing continued growth, including the new CH 50, <unk> heavy lift helicopter space programs and a number of international programs.
In June we announced a long term agreement to supply advanced composite structures for.
For the CH 50, <unk> King stallion heavy lift helicopter program.
Currently hexcel supplies carbon fiber <unk> honeycomb and rotor blades for the CH 53, K under this new agreement. We will also supply composite structures for production of the cargo ramp and ask kit components with the first delivery of these parts expected to Sikorsky in 2020.
Three.
The award significantly expands <unk> composite content on the aircraft, where our ship set value is between two and a half and $3 $5 million, depending on whether we provide the blades or those are built in house by Sikorsky.
This award recognizes <unk> leadership in producing high complexity aircrafts structures at our Kent, Washington site.
You will recall that in 2021, we announced plans to transition can toward more advanced composite production and higher value add growth programs and this additional work is representative of our successful and ongoing transition.
I also want to mention how exciting it is to see the first set of full color images taken by the James Webb space Telescope and released by NASA. This month.
As you know it is the largest and most complex and the most powerful space telescope ever launched and <unk> advanced composite materials not only support its critical structure, but also where onboard the ariane rocket that launched into space, which.
We congratulate both NASA and Northrop Grumman on this remarkable accomplishment.
And finally, the emerging trend of increased defense spending by Western Nations adds further momentum to our favorable outlook for space and defense.
This includes the recent black Hawk order by the U S Army both for its own purposes and for the U S. Foreign military sales program as well as the global demand for the F 35.
Current plans our department of defense to acquire over 2400 F 30, fives and the international demand adds hundreds more including from the eight cost sharing partner nations.
Turning to industrial sales declined three 5% during the second quarter on lower wind energy sales.
Although much of the decrease was offset by strengthening sales in the automotive and recreation submarkets as well as consumer electronics.
Our industrial team is doing a terrific job in replacing the wind energy business with growth from other existing markets as well as identifying new markets, where hexcel can provide value, adding solutions that have the potential to be solid growth contributors over time, such as marine and select energy applications.
Year to date total <unk> sales are up almost 27% year over year in constant currency and EPS is at 55 <unk>.
Compared to a negative <unk> this time last year.
All of which reflects <unk> saw a strong performance and forward momentum.
Now, let me turn the call over to Patrick to provide more details on the numbers.
Thank you Nick.
As a reminder, the majority of our sales are denominated in dollars. However, our cost base is a mix of dollars euros and British pounds as we have a significant manufacturing presence in Europe .
As a result, when the dollar strengthens against the euro and the pound our sales translate lower while our costs also translate lower leading to a net benefit to our margins.
Conversely, a weak dollar is a headwind to our financial results.
We hedge this currency exposure over a 10 quarter horizon to protect our operating income.
The recent strengthening of the dollar versus the euro and pound had a negative impact to our sales during the second quarter, while providing a tailwind to margins.
As a reminder of the year over year sales comparisons I will provide or in constant currency, which thereby removes the foreign exchange impact to our sales.
Turning to our three markets commercial aerospace represented approximately 58% of total second quarter sales second quarter commercial aerospace sales of 227 $6 million increased 49, 5% compared to the second quarter of 2021.
With strong growth in narrow bodies, the <unk> hundred 50 program and business Jets.
Also noteworthy is that commercial aerospace sales continued to grow sequentially from the first quarter of 2022 based primarily on growth in Airbus platforms.
Space <unk> defense represented 28% of second quarter sales and totaled $111 9 million, increasing 7% from the same period in 2021.
Growth drivers included space, the CH 50, <unk> heavy lift helicopter and a number of international military platforms. The growth was offset by some softening of sales to legacy roads crop programs, including the Black Hawk and V 22.
Industrial comprised 14% of second quarter, 2022 sales industrial sales totaled $53 $5 million decreasing three 5% compared to the second quarter of 2021, while we experienced continued strength across a variety of markets, including <unk>.
Creation automotive and consumer electronics, this was more than offset by lower wind energy sales.
Wind energy represented just below 30% of second quarter industrial sales.
On a consolidated basis gross margin for the second quarter was 22, 8% compared to 19, 3% in the second quarter of 2021.
The improved gross margin principally reflects operating leverage within the business as we grow back into our capacity there.
The highest sales volume year over year, and greater capacity utilization is reducing the under absorption of fixed costs.
And our cost saving actions taken during the pandemic are also boosting results.
We continue to manage inflationary cost pressures and global logistics challenges, while at the same time minimizing delivery delays to our customers.
As we have previously explained many of our largest raw material purchases are protected by long term contracts or financial hedges that are designed to layer in pricing changes overtime and minimized quarterly volatility to earnings.
We continue to experience some inflationary cost impacts, we certain raw materials logistics costs consumables, such as packaging materials and higher energy costs.
As a percentage of sales selling general and administrative expenses and R&D expenses were 11, 4% in the current quarter compared to 13, 3% in the second quarter of 2021.
As this decreasing percentage of sales illustrates we remain focused on cost control and improved efficiencies. So that our sales grow at a higher rate than cost returned to the business.
Adjusted operating income in the second quarter was $44 7 million.
Or 11, 4% of sales.
The year over year impact of exchange rates in the second quarter was favorable by approximately 30 basis points.
The <unk> team is pleased to have generated a double digit quarterly adjusted operating margin again for the first time since the beginning of the pandemic.
We are delivering consistent sustained performance in the face of a challenging environment.
This includes the previously mentioned logistical and supply chain issues and inflationary pressures, we are all facing as well as managing through some near term new employee training challenges.
We will work through this as our employees gain experience. However, it is one more headwind that our team is managing.
These challenges are not an excuse and based on the confidence we have in our ability to execute we are maintaining our 2022 guidance and continue to toggle up double digit adjusted operating margin for the full year of 2022.
Now turning to our two segments. The composite materials segment represented 81% of total sales and generated a 14, 1% adjusted operating margin strengthening on higher capacity utilization as the adjusted operating margin in the comparable prior year period was 10, 7%.
The engineered products segment, which is comprised of our structures and engineered core businesses.
Represented 19% of total sales and generated a 12% adjusted operating margin.
The adjusted operating margin in the comparable prior year period was seven 6%.
The effective tax rate for the second quarter of 2022 was 23% compared to 58% in the second quarter of 2021, which included a discrete tax charge of $2 $7 million.
Related to the re measurement of the net deferred tax liability and a foreign tax jurisdiction.
Net cash provided by operating activities was $18 3 million for the first six months of 2022 compared to $38 9 million for the first six months of 2021.
Working capital was a cash use of $95 $1 million year to date in 2022, increasing to support higher sales. This compares to working capital being a cash use of $19 6 million in the first half of 2021.
Capital expenditures on an accrual basis were $28 3 million for the first six months of 2022 compared to $7 8 million in the prior year period.
Capital expenditures are increasing this year on higher capacity utilization that increases maintenance capex plus growth capex as we expand our production in Morocco to support commercial aerospace and defense markets.
As well as building, our new research and Technology Innovation Center in Salt Lake City, Utah to support next generation aircraft and future industrial applications.
This state of the Art research and Technology Innovation Center replaces a much smaller RMC, we have in Dublin, California, We sold the California science in the second quarter and recognized a gain on the sale of $19 4 million.
We have a short term lease from the buyer as we prepared to move the testing equipment to Salt Lake City.
The property sale proceeds were used to pay down our revolver. However are not included in the free cash flow calculation.
Free cash flow for the first six months of 2022 was negative $19 6 million compared to a positive $29 $7 million in the comparable prior year period.
As we referenced last quarter, our free cash flow generation is typically weighted towards the second half of the year.
Due to the macro environment with global logistics challenges previously discussed we are holding more buffer or safety stock inventory than we would during normal times the higher levels of inventory will help to support and protect our customers as much as possible from the prevailing supply chain stresses facing the.
World today.
We expect this situation to persist.
Just for at least the remainder of 2022.
Depending on the timing and severity of the logistics issues persisting, we may experience some headwinds to free cash flow generation as inventory use is more cash than previously expected.
We are now operating under the original revolver terms and conditions per the 2019 agreement with the exception of the facility limits, which is now $750 million.
Our leverage as measured by gross debt to trailing 12 month, adjusted EBITDA must be at or below three seven times measured at each quarter and as of June 32022, our leverage was comfortably below this level.
We did not repurchase any common stock during the second quarter of 2022, the remaining authorization under the share repurchase program at June 30 was $217 million.
The board of directors declared a <unk> 10 quarterly dividend yesterday payable to stockholders of record as of August five with a payment date of August 12.
With that let me turn the call back to Nick.
Yes.
Thanks, Patrick.
We are encouraged to see passenger air travel nearing pre pandemic levels in many parts of the world and the pull from our customers for lightweight strong durable advanced composites continues to grow.
Throughout the remainder of 2022 textile we'll stay focused on efficiency and productivity.
Cash management, and overall performance, especially in quality and on time delivery.
We recognize the stresses and strains on the supply chain and labor market amid.
Amid the uncertainty we must remain vigilant as we move forward.
We are also keenly aware that macroeconomic factors such as crude oil prices are causing inflationary pressures not only for suppliers, but also for the airline industry as a whole at.
At the same time, we also know that those pressures incentivize airlines to look for solutions to mitigate those costs and that means a greater pull for new aircraft made from lighter weight composites that not only run more efficiently, but also help meet sustainability objectives.
Our commitment to transparency and collaboration with our customers is a key differentiator for XL.
Our team is in constant contact with our key suppliers and customers to ensure that we are aligned with raw material availability and customer demand for finished products.
We will always continue our focus on next generation products.
Heavyweight innovation for lightweight solutions and.
In fact, a couple of weeks ago, we announced that <unk> has joined with spirit Aero systems Europe at its aerospace innovation center in Scotland to develop more sustainable aircraft manufacturing technologies for future aircraft production, including composite manufacturing processes designed for high volume production of <unk>.
Next generation aircraft.
Our message from earlier this year remains unchanged.
Our fundamentals remained strong and our team is focused on driving through all the challenges to take full advantage of the significant growth that lies ahead to ensure that we deliver strong shareholder value.
Brent will now turn it over to you and take questions.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad in the interest of time, please limit yourself to one question and one follow up question.
Your first question comes from the line of Sheila <unk>.
With Jefferies. Your line is open.
Hey, good morning, guys and thank you for the time.
Sure.
Maybe if we could think about margins and I know Patrick you don't guide to a profitability, but you had pretty strong margins in the quarter. How do we think about them trending in the second half and as we exit the year.
Companies talk about cost and supply chain headwinds.
<unk> spoken about $150 million and cost take out how much of that do you think that's permanent now as we go forward.
Yes, hi, Sheila so in terms of margins I mean, I think we said it again in those comments, we're still aiming for double digit adjusted operating margin for the full 2022 year.
And you can kind of back into that obviously you have seen in Q1, and Q2 now and the year to date position, which is just under double digits. So we're looking to sort of another couple of strong solid quarters to closeouts, you're absolutely right. We've got the inflationary pressures we've got the supply chain challenges we are working very.
Hard to mitigate that.
They are real and our team as you can imagine is working very hard, but we're standing by that double digits that double digit target in terms of the $150 million cost takeout I think as we've said all along is as the business grows back and we're sort of adding hundreds of millions to the top line.
The overhead costs will grow back now our objective is to hold on to as much of that if you like long term.
Possible.
Become the sort of depreciation headwind essentially compared to when we were at this level.
The level of revenue historically.
A large chunk of it will come back, but we're going to work as hard as we can to minimize that and hold onto a larger portion as possible I'm not going to call out a specific number but that definitely our objective to hold on to that sort of margin leverage opportunity that we did see in Q2.
Okay, great. Thank you.
Your next question is from the line of David Strauss with Barclays. Your line is open.
Okay.
Good morning, Thank you.
Good morning, David.
Hey, Nick So your revenue guidance for the for the full year looks like it's implying relatively flat in the second half.
Is that is that currency or I would assume commercial aero gets a little bit better sequentially. As we go from here and maybe defense industrial relatively flat. So can you just talk about second half versus first half on the revenue side.
So David.
Al.
I guess I'll answer it this way and that clearly we've got a wide range on both our topline and our EPS.
And perhaps a little bit of conservatism and caution built in there simply because of what we're seeing with uncertainties in the supply chain and the inflationary pressures in the energy issues.
Clearly based on what we see today, our demand is higher than what the midpoint of our guidance is indicating.
<unk> provided we're able to overcome the challenges that are in front of us.
We certainly would expect and hope to have the opportunity to deliver beyond the mid point.
Okay.
Okay, Thanks and.
On currency, Patrick I know you commented about hedging now.
Kind of two two and a half years in the future but.
We've seen a.
Pretty significant strengthening here and the dollar.
Which should be a tailwind for you guys from a from a.
Margin and EPS standpoint can you just talk about what that impact would look like as we move out over the next year or two.
Yes, sure. So as you absolutely correct me recognize we hedge over 10 quarters, we layer in.
The hedges quarter by quarter, we follow a strict sort of guideline and process in 2022, I mean, a lot coming into the year, a large portion of our exposure was already hedged and so the benefit of the what I would call very strong dollar today is marginal and I think you saw it was about <unk>.
30 basis points in the quarter that that tailwind will continue through the year and what we're doing overseas now locking in strong dollar.
Rates for 2023, and <unk> and into 2024, and so we're kind of giving ourselves that strong but it is really a smoothing benefit over time as we look out so we will get that benefit spread out over time, it's going to help us you're not going to see some dramatic boost to margins.
So I just don't want anyone to have that expectation really as a result of a smoothing policy. So we're in a good position a strong dollar is definitely a tailwind and we're going to benefit over the coming quarters.
Okay.
Great. Thanks very much.
Your next question is from the line of Ron Epstein with Bank of America. Your line is open.
Okay.
Good morning, guys.
Maybe just a bigger picture question.
When you think about the growth of the business with.
New airplanes from Boeing looking like it's going to get pushed out.
Indefinitely.
What are you looking for growth in other areas.
You mentioned in your prepared remarks.
Some work in commercial space I mean, how big do you see that getting towards your I mean.
Ultimately, where do you see that your defense business could go to.
To drive growth.
Okay.
So.
With respect to growth opportunities less of new airplane, we always have areas, where we're working with our customers on converting metal parts.
Given the new technologies that are evolving given the new efficiencies that are evolving to continue to drive performance improvements as well as to push the envelope on development when that new aircraft does come along.
So commercial aerospace clearly theres a lot of work going on to prepare for that next new airplane.
Assuming it will require advanced composites more producible composites.
And a wider portion of the aircraft will be composite at the end of the day and Theres a lot of working going on today with virtually all of our customers to get in that position and develop those materials sold their production ready.
On the space and defense, that's an area, where we see exciting.
Citing growth and we are even to the point of looking at our organization and considering some modifications to basic.
Basically be more focused in various areas that perhaps we didn't really concentrate on in years past. So the new technology on the various platforms, whether they are unmanned or manned or electric or advanced helicopters with farro are in Florida.
Sure.
We're working all of those and continue to be optimistic based on what we see and what we.
Hope to see on budgets and western spending increases.
Got it got it and then.
If you can disclose this.
What's the contribution on an <unk> through 'twenty one for you guys. When we think about where that program could go.
Or maybe more broadly how meaningful is it for the company.
Well, it's the ship set content is 200 to $500000.
And obviously Airbus backlog.
If my memory is correct is around 6000 aircraft.
<unk>.
Clearly Airbus are ramping up as we speak with a target to get to 65 by mid 2023.
And the supply chain is looking at going up to as high as 75 in the out years. So if you do the math on that kind of ship set content type both times those types of volumes. It is very meaningful for hexcel as is the 737 Max as it grows back up.
Into a prior production level, which we expect to do in the out years as well.
Got you and then maybe one last one if I can.
What's your sense on when we could see 780 Sevens fact doubled double digit production lines.
Yes.
Well I don't have a crystal ball, but after spending a week at Farnborough I would just say that talking to.
Various peers in the supply chain. It seems like there is a lot of energy and momentum and hope that it's going to be sooner rather than later.
I'll leave it to Boeing to.
Potentially elaborate on that when they report tomorrow.
Alright, thanks, guys.
Youre welcome.
Okay.
Brent do we have another question.
Your next question is from the line of Michael <unk> with <unk> Securities. Your line is open.
Hey, guys. Good morning, Thanks for taking the question and nice results.
Just within the engineered products segment, the margins, they're dipping sequentially and I know youre not going to guide towards the remainder of the year, but any any sort of color you can give us sort of the margin step down in the quarter, there sequentially and I guess the same for the space.
Defense revenues I think you may have called out Black Hawk in 'twenty. Two just wondering if that was the driver for the sequential declines in revenue there.
Yes, so if I start with engineered products I mean I think.
I mean, I've said, it before and I have no doubt in the future I'll say it again, I mean engineered products is a bit lumpy.
It's kind of program specific and we get tooling from time to time coming through Q1 was particularly strong I would say that.
I mean Q2 to be honest is in the normal range I mean, I think historically, we kind of said 12% to 14%.
For engineered products, where we are at the bottom end of that range, both were kind of there or thereabouts. So it is lumpy.
As with space and defense, Similarly, I mean space, especially can be lumpy with sort of bulk orders quarter to quarter coming and going.
And defense itself some programs up down in the supply chain is still playing with a bit of inventory here and there so I.
I mean year over year, we I think we were 7% up in constant currency. So that's kind of in line with our guidance essentially for the year.
And I honestly I wouldn't get too hung up on the sequential galaxy of one quarter over another.
Got it and just last one maybe what we're almost asking where are you guys. On the 787 right now is that line totally idled or do you have any sort of expectations are I know you said youre going to wait on Boeing tomorrow, but any any contributions at all right now from the 77.
Well, we're at a very low rate aligned with Boeing so.
Our shipping stays fluids theyre running their line I think the expectation is as soon as they get clearance from the FAA Theyre, probably will follow with a fairly quick announcement on their ramp increase.
Going up to as high as five in the foreseeable future. So I could just say, it's a very low production on <unk> part today pretty much aligned with what.
Boeing are running off their production line.
Got it thanks guys.
Thanks, Michael.
Your next question is from the line of John Mcnulty with BMO capital markets. Your line is open.
Yes, thanks for taking my question.
So I guess the first one would just be with regard to some of the inflationary pressures that youre seeing.
What are the levers that you have to offset them do you have any on the revenue front or is it all could be internal kind of self help related drivers like how should we be thinking about that.
Yes, Hi, John I mean, we always see help ourselves as much as we can if I can start there I mean, we have these good long term contracts for some of our input costs. Our key raw materials, we're always working on continuous improvement and efficiency to overcome inflationary cost pressures we do.
Have some sort of levers on on pricing or industrial space, we were already passing through in many instances and that rolls through and that helps in aerospace there is more of a lag.
Some of our contracts.
A difficult to move on but there are many others that have annual sort of checkpoints. If you like and review points, which we will push as much as we can as we go into 2023, so we have some.
Pricing ability.
In aerospace is not zero.
Not as flexible as industrial where we're pushing hard so we're working on both sides of the equation, helping ourselves as you put it as much as we possibly can that's in our control and we will push the pricing levels, where we have the opportunity.
Got it that's helpful. And then I guess just a second question you have a big European footprint and Luckily I guess.
Not really any exposure or much exposure on the on the Germany side, but I guess.
With concerns about Germany being cut off on the gas front some issues around potential constraints there.
Can you speak to the raw material risk that you might have with raws may be coming from that region, and how you might be kind of setting yourself up to to avoid any issues that might pop up as we as we get into the back half of the year, if if the spigots do get shut off.
Yes, John So we do have a site in <unk>, Germany that supports our customers in Airbus being one of the primary ones there and we're monitoring what we're currently doing with respect to.
Raw materials and energy in that area and even some conversion options that we can look at if we have to I'd say the big benefit. We have is that again remember our assets are fungible. They are very flexible and if something happened in the short term to impact Germany.
<unk>.
We could reallocate that production to other sites and we basically wouldn't miss a beat on that with.
With respect to the broader impact on indirect and chemicals, and Germany has a pretty good presence of large chemical companies and if they're forced to.
Men limit their output <unk> limit their uptime.
That could ripple through the industry and again I can't predict what the impact would be.
I can just tell you it's something I hope, we don't have to deal with.
Got it fair enough thanks for the color.
Thank you John .
Your next question is from Pete <unk> Kubicki with Alembic Global your line is open.
Hey, good morning, guys.
Hey, Hey, guys. The updated kind of production outlook for the F 35 kind of kind of flat rates for the next few years before expected to ramp again shall we say that that matches the revenue outlook for you guys there.
Are there some spares that would be additive for you guys or other related revenue for F 35.
Fundamentally we will track the $1 55, $1 56 sort of outlook rates, there or thereabouts, a little bit of noise, plus or minus sort of single digits.
With inventory soda plays and push outs or pull ins occasionally, but I think the in terms of spare parts and extra things like that we have a little bit of after market with our <unk> business for the F 35, but fundamentally we're going to attract the the headline barrels right.
Okay I appreciate it thank you.
Your next question is from the line of Robert Spingarn with <unk> Research. Your line is open.
Hey, good morning.
Good morning, Robert.
Nick you talked about content upside across the portfolio are constantly looking for things you can do and I wanted to ask you specifically about wing of tomorrow for the <unk> hundred 20 spirits recently commented that they produced a 51 foot.
Long composite skin out of autoclave that can be used there and it can be ready in two to three years. So I wanted to see what type of work you might be doing on the wing of tomorrow and in general what your a lot of these programs are talking about re winging with composite so how much of an opportunity is wings all by itself.
So.
We're excited to see that the first demonstrator full scale was built we've been working with Airbus for.
Long long time on smaller scale ramp up various technologies.
But in the wing there are several different technologies being worked at the same time in parallel because I think Airbus and the aircraft manufacturers they want to keep the flexibility to go where the technology will afford them the best processing, the best lay up and the overall best.
Economic solution based on one that new wing is launch so infusion technology out of autoclave technology high rate lay down technology different fiber technology and resin technology.
Are all being used and tested and proven in the Airbus wing of Tomorrow demonstrator. So the demonstrator that was just spill it.
One phase of many programs that are ongoing at various countries to support that advanced technology and I can tell you. We are very closely aligned with Airbus and their pursuits and with our other customers on how they are preparing for the next new program platform, whether it's a narrow body.
Or a new business jet or a new rotorcraft.
Okay, and then just quickly Patrick for you on the back of that that would be organic content growth inorganic via M&A as the balance sheet improves here and the environment in the end markets get better how do you think about capital deployment do you look more toward M&A now with some valuations out there under pressure.
Or more on the share repo side.
What is going to be a balance so I think as we come out of this year and go into next year. We've already flagged we are going to start to generate cash.
Capex levels will remain subdued sort of under $100 million or so.
Forthcoming years.
And thats going to leave us in a position to exactly do that think about some share repurchase which I mentioned, we will do some but absolutely we will be looking at M&A and if we see in.
And our disciplined way sort of as you say value propositions that meets our criteria are.
<unk> value add sustaining technology, the hexcel can bring something to where definitely is definitely on our agenda. So.
Organic growth I do expect to be part of the coming year sort of process, along with some share buyback, but it's not a 100% one or a 100% of the other there'll be a balance but it will include M&A.
And would M&A, Nick this might be for you would M&A be vertical or horizontal.
Where can you add.
Well I don't I think our lens.
Is pretty open as we demonstrated back in 2019 'twenty with the Woodward.
Direction, we were moving so I can tell you our business development team are looking.
Adjacent upstream downstream as well as what.
Products can enhance our total offering to our customers.
Through value proposition in advancing composite penetration or material penetration.
Okay. Thank you Paul.
Thank you.
Your next question is from Richard Safran with Seaport Research Partners. Your line is open.
Net Patrick Kirk Good morning, how are you.
Good morning morning.
I wanted to ask you about mix and if you've already mentioned this and talked about it and I missed it I apologize.
Correct me, if I'm wrong, but the quarter over quarter improvement intersegment indicate mix was a bit better.
I know that sometimes mix can be affected by different things, but I thought you might discuss <unk>.
Mixed trends from here is.
Is this just simply a case, where with higher volume should we expecting more of your higher margin products.
Yes, I mean mix is a part of it I mean, the biggest step up we're seeing is volume leverage right now so as we bring through the sales we bring through more sort of variable margin and we tend to have a very strong variable margin overall as we're bringing that through against the the overhead cost base.
We've talked about the cost savings that we've put in place.
Yes, that's really what's driving the incremental margins and the bottom line margin step up.
Mix.
And I guess has some play is probably going to be slightly less pronounced I think we talked quite a lot about mix in 2021, we had a lot of fiber coming through.
And.
And that helped us in the early days really get it quite a strong acceleration I think.
Our overall margins at a variable level are probably going to steady off I mean, when sales coming down we've talked about that was probably one of our lower margin businesses. So as we grow some of the perhaps more value add industrial sales, we may get a marginal benefit there obviously industrial is any sort of 13% 14% of our.
Sales, but it all helps.
So I wouldn't overplay the mix I think as we pull through <unk> carbon fiber and we're putting a lot through today and as that increases that is the best sort of mixed passing we can have but I think we're getting to sort of a steady state mix now and it's really top line growth that's going to continue to give us the leverage overhead over the overhead.
To drive double digit margins this year, and then increase as we go forward.
Okay and then just.
One more if you would comment further.
Further Nik you mentioned a tight labor market. So I wanted to ask you about employment and expect level.
Appointment levels and expectations there how much you expect to grow the workforce, how youre progressing toward that goal and I'm kind of curious if you could comment on if you think that labor cost inflation.
Is starting to become an issue.
Okay.
So I would say it's mix it depends on the.
The site the location we see.
A few tight areas I can say in the U K.
They're attracting recruiting and hiring labor has been a little more challenging than some of the other areas we have but.
But I would say we are being successful and we brought in.
The team that we need to deliver to the demand today, obviously as we continue to grow and ramp up our assets, we're going to be hiring pretty aggressively for the next 12 months I would I would say that one of the bigger impacts on the learning curve, we're going through.
As with respect to training of new employees and getting their output and efficiency up to the level, where we were pre pandemic and we're on that journey. We're on that path we have history.
That gives us confidence on how that growth and that improvement will happen as volume increases and over time. So.
Labor is currently an area we've had to.
Redefine how we go out attract and recruit labor, but we've been very successful and I attribute that to <unk> future our products our culture, the drive towards sustainability and innovation all of which are attractive to new talent in the market.
Place.
With respect to labor inflation.
Clearly it was higher this year than it had been historically and based on what I'm seeing right now I anticipate it's going to be higher next year.
But to zero in on how much.
That's an unknown and we'll continue to monitor our competitiveness, we will make adjustments real time as required.
And we'll see what the data shows us as we get ready for 2023 planning.
Thank you very much.
Thank you.
Your next question is from the line of territory Misra with Baron Berg. Your line is open.
Thanks, and good morning, I was just curious about your consumer electronics business.
I know, it's not a big part of your portfolio, but what exactly are you, making because many of the electronics companies are seeing a slowdown so just wondering what's driving growth for hexcel.
Yes, hi, prior to us, it's really been carbon fiber quite honestly and directing some of our carbon fiber into what has been a decent market sort of coming out of the pandemic.
Laptops sort of adopting carbon fiber some of the sort of circuit boards, where they want strength and lightweight stiffness.
There's been quite a lot of success directing material there.
So I think the demand has been strong for some of these consumer electronics, we will see going forward.
But certainly to date, it's been good business for us.
Alright, thanks interesting.
Patrick if I could ask just one more you might have covered that earlier, but in your second half guidance.
Are you assuming any restocking related to <unk> hundred 50 are not so much.
Yes.
I guess, our second time, sorry, our second half guidance to be clear as sort of by default.
But.
In terms of restocking it is going to be a gradual process across all the programs I mean, whether it's the <unk> hundred 50, or the <unk> hundred 20 family or now the Max and hopefully the 787.
Stocking is abrupt seats very quickly it comes down the restocking will take place over a number of years. So as the $3 50, if we talk to that specifically moves from five to six at some point early next year, and then hopefully up to seven and we're going to see the freight to come on.
Yes.
Can they be restocking in those specific program supply chain, but it is going to be a gradual process and I wouldn't say, there's anything specific built into the second half of this year.
Got it understood. Thank you.
Your next question is from Ken Herbert with RBC. Your line is open.
Yes, hi, good morning, Patrick good.
Good morning, Ken.
I guess, Patrick I wanted to ask on on working capital. The last couple of quarters, you've invested about $100 million. It looks like I think you called that out in your comments.
What do you need to see aside from just working capital build to support rate increase what do you need to see.
Supply chain or other factors to be feel comfortable that you can.
Well, that's a little bit and is there a point here in the second half of this year when maybe it becomes a source of cash.
Yes, I think in the current environment tend to be honest I think we're really looking at 2023 before the world dramatically improve some and I am talking about shipping delays shipping constraints.
Ramp up pressures on lots of sort of the chemical guys you feed into the raw materials, we buy and so our sourcing team are working day in day out to get the raw materials and it is a battle that.
I don't know that any of us have seen anything like this I mean credit to the team that's been hugely successful thus far.
That's our objective clearly is to maintain that going forward, but part of it is just to be a little bit cautious to hold onto this buffer safety safety inventory and I think that's going to persist I think I said in my comments through the end of this year I think it will be in 2023, hopefully we see some improvement we get some confidence.
We want to do the very best for our customers and if we have to hold a little bit of working capital to do that that's what we're going to do.
Okay, that's helpful and if I.
I could.
On the business jet outlook strong growth. There can you talk about the opportunity to maybe replicate what you've done obviously on the on the Falcon Tenex on other programs, perhaps or with other customers and at what point does that growth start to moderate.
Usually the second half of this year, where is completed next year as you anniversary the much more challenging comps.
So.
Business Jets.
The nice thing about business Jets are there are a lot of different platforms.
And the volumes tend to be a little lower content are going up so there's not a specific program that really drives that segment. It's a combination of.
The entire market set.
Clearly Gulf stream has been pushing the envelope with respect to composite penetration in.
We have very strong content on the new.
Wide business Jets.
<unk> hundred 50, and strong content on the <unk> 600, and the <unk> 500, we also have great positions on the Embraer 190 <unk>.
<unk> the challenge or the list goes on and on.
If you look quarter over quarter virtually every platform.
<unk> grew from last year's level.
And that's based on.
Backlogs, it's based on tight inventory and it's based on flight hours continuing to go up so clearly lightweight materials make airplanes more efficient and it doesn't matter if it's a wide body and narrow body or a business chat and it's just a matter of time until more and more penetration.
It takes place into the primary structures as it did on the Falcon Tenex So IMAX.
Im excited we have teams actually meeting with our customers today in Salt Lake City on Biz jet strategy.
And it's a great growth opportunity.
And we have a great position with our customers there.
Great. Thanks, Nick.
Okay.
Your final question comes from the line of Mike Sison with Wells Fargo. Your line is open.
Yes.
Okay.
Hello, Mike.
Okay.
Okay, Brian if we could just go to one more and its just one final question only place.
Certainly your next question final question comes from Gautam Khanna with Cowen Your line is open.
Okay. If there is any progress thanks.
You guys.
Patrick how are you doing I was wondering if there is any program it sounded like the 787, but.
Where you guys are.
Misaligned.
There is destocking.
Misaligned with underlying assembly rates at.
At Airbus or Boeing.
And if so which ones.
I think we do a very good job of understanding what inventories are being held by our customers what they are running off their production lines.
We know our ship set content and we triangulate to make sure that.
From a from a topline from a high level from.
Public disclosure that we're aligned and again.
Patrick said on the Destocking side it was very abrupt it was.
A very significant today given that we've been at lower rates on most of the platforms for a period of time the supply chain has stabilized I think we're very aligned virtually with all programs that we're tracking in that we have visibility to so I don't see any misalignment that's material.
In our in our supply chain now I would have to remind everybody that some of our supply chains have 40 or 50 ship to locations. So to think that every single supplier in that supply chain is going to be at the exact same build rate the exact same level of inventory.
In days.
That would be.
That would be a poor assumption and that's not how it works and that's why we see some lumpiness even in the commercial aerospace around the supply chain and our various ship to locations and customers.
Thank you.
Ladies and gentlemen, thank you for your participation. This concludes today's conference call you may now disconnect.
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